ECO331H1 Chapter Notes - Chapter Week 7: Mental Accounting, Sunk Costs, Flat Rate
Document Summary
How outcomes are perceived and experienced, how decisions are made and evaluated. Decisions can help us evaluate perceived attractiveness of various choices. Money in one account not perfect substitute for money in another account. Value function defined over gains and losses relative to some reference point. Focus on changes in wealth rather than level of wealth. Transactions evaluated one at a time rather than in conjunction. Both gain and loss functions display diminishing sensitivity. Losing hurts more than gaining yields pleasure. Consumers get two kinds of utility from a purchase. Measure of value of good obtained relative to price. Difference between amount paid and "reference price" for good. People are willing to pay more for a beer from a resort than a small run down hotel because reference price for resort is higher. When to leave mental accounts open or when to close them. People reluctant to sell securities that have declined in value.
